Jun 13, 2016

U.S. Fiscal Outlook Worse than Standard Forecasts Show

Post by Derek Yale

Debt to Double in 15 years:

Using data from CBO’s long term outlook and 10-year budget projections and applying a more realistic set of assumptions about future Congressional actions shows that America’s fiscal crisis is even worse than many estimate. Based on CBO’s alternative budget scenario—a spending calculation based on the likely actions of Congress—our projections estimate that in just 15 years, the national gross debt will more than double—from $19.2 trillion this year to an overwhelming $42.8 trillion.

Let’s explain in a little more detail why short-term projections don’t tell the whole story. When CBO publishes long term spending and debt projections, it only provides information on what is known as debt held by the public. But it ignores intergovernmental debt, which is debt the government owes itself for things like they Social Security Trust Fund. Currently, intergovernmental debt accounts for almost 28 percent of all U.S. debt. So it is more accurate to look not just at public debt in the long term, but gross federal debt.

In order to estimate long term gross debt, we looked at recent trends. Every year, CBO publishes 10-year dollar estimates for gross debt and debt held by the public, by year. We used these projections to calculate the ratio between debt held by the public and gross debt for each year (2016-2026). We then took the average of those ratios and found that debt held by the public as a percentage of gross debt averaged 76% over those 11 years. Moving forward we will take the dollar amount of debt held by the public and divide it by the 76% average to get corresponding gross federal debt in that year.

The next step is to determine the dollar amount of debt-held by the public. In order to do so we took CBO’s long-term debt held by the public projections (given as a percent of GDP) and convert that into dollars by applying that percentage to CBO’s nominal GDP (given in dollars) projections. From there we get long term debt held by the public in dollars. We applied this method to debt held by the public in both CBO’s baseline projections and the alternative scenario.
When we have long-term debt held by the public projections by year and in dollars, we can then divide this by 76% for each corresponding year and find gross debt over time. What’s more is that this is only an average, meaning the reality could be quite worse and this is fairly conservative.

Social Security and Medicare Insolvencies Based on Congress’ Most Likely Action:

According to Social Security and Medicare Boards of Trustees, due to “rapid population aging caused by the large baby-boom generation entering retirement and lower-birth-rate generations entering employment,” trust funds for Medicare and Social Security will both be depleted by around 2030 without serious reforms—which means we are less than 15 years away from a major debt crisis.

Specifically, interest income and trust fund assets will be able to cover Social Security deficits until 2034, and Medicare deficits until 2026. When the Medicare funds run out in 2026, it is highly likely that Congress will begin to siphon funds from Social Security to cover Medicare deficits. Just last year, Congress took the same approach when the trust fund for Social Security Disability Insurance (SSDI) when insolvent.

Congress “fixed” the problem by transferring $117 billion from the retiree trust fund, keeping SSDI alive for now but also hastening the insolvency of traditional Social Security. We have no reason to believe that Congress will act any differently when Medicare becomes insolvent, which will in turn speed up Social Security’s depletion—likely leaving both programs bankrupt by 2030.